Chronicles Of Depression 2.0: #361: Roubini 2

GHARIB: So you’re saying that the worst is ahead of us. What is going to be the magnitude of it?

ROUBINI: Well, I expect that the recession is going to last two years. We’re still at the beginning stages of a recession. I expect that the cumulative fall of output from the peak might be on the order of 5 percent, much bigger than the recent recessions. I worried that the unemployment rate might rise to be about 8 to 9 percent. Right now it’s only 6.1 percent. So it’s going to be severe and we’ll have hundreds of smaller financial institutions (INAUDIBLE) are going to go bankrupt. And even some of the regional banks might be in severe trouble, might have to be closed down or merged with other institutions. So this is a severe crisis.

GHARIB: So how important are falling home prices in all of this?

ROUBINI: As long as they fall, there’s a residential construction, recession’s going to continue. Secondly, homeowners feel less rich and they’re going to spend less. There is going to be less consumption. And three with falling prices so much, there will be about 20 million houses going to be under water with the value of their homes being less than the value of their mortgages and therefore with an incentive to walk away from their homes.

Emphasis added by me.

OK, that’s the first time I’ve heard of the possibility of twenty million homeowners entering negative equity.

That’s devastating.

And it’s even more incentive for the Feds to finally adopt the plan by Luigi Zingales.